India has 1.3 crore micro, small and medium enterprises (MSMEs), constituting almost 75% of the country?s total enterprises. Of the total MSMEs?employing 42 million people, and contributing around 9% to the country?s gross domestic product and 40% to exports?55% complain of non-availability of adequate funds. There are 1.14 lakh sick MSMEs, 74% of which blame the lack of funds for their current status.
Growth rate of bank credit, the major source of funds, to the sector has come down from 35.6 % in December 2007 to 7.5% in December 2008. And, only 40 lakh MSMEs have accounts with banks.
Despite initiatives from the government and Reserve Bank of India, banks have curtailed the flow of funds across the board as the confidence is at its lowest in a decade due to the global slowdown. Banks are instead parking funds in government securities for stable and risk-free returns.
The Reserve Bank of India data shows that banks invested Rs 62,386 crore in government securities during the fortnight ended January 2, against negative investment of Rs 20,161 crore in the previous 15 days. They lent Rs 11,961 crore as non-food credit during the 15 days. In December, banks saw a negative growth in disbursement of non-food credit.
?The problem looks more serious for MSMEs because of a large number of them are denied loans. If loan is denied to one big corporate, 10-15 small borrowers would be said no. Banks in general have not made an anti-MSME policy. However, at the branch level it depends on the exposure to a particular sector,? an official of a public sector bank said on the condition of anonymity. Public sector banks meet almost 90% of loan demand by MSMEs.
On a separate note, the official said, ?It is not the responsibility of banks to promote the MSME sector. Banks cannot do anything for non-performing enterprises?.
The banks that are lending to the sector charge higher interest rates. Sometimes this goes upto 200 basis points higher than the prime lending rates, according to industry estimates.
A top official of Punjab National Bank said, ?The global liquidity crisis and stock market downturn has choked the international sources of funds for the MSMEs. The option of raising money through FCCBs has dried up. Back home, NBFCs and mutual funds have no money. So the only option available is domestic banks. But credit to unrated firms needs higher capital to be set aside under Basel II norms. So, higher the risk higher would be the cost?.
But the low availability of funds is not new for the sector. According to Federation of Indian Small Scale Enterprises (FISME), which quoted a study by National Commission for Enterprises in the Unorganised Sector, the refinance requirement for units with investment in plant and machinery upto Rs 5 lakh for 2006-07 was around Rs 3,71,000 crore, against which the supply was only Rs 59,000 crore?a shortfall of Rs 3,12,000 crore.
Seeking to ease the flow of funds to MSMEs, the government has allowed 75% guarantee for loans upto Rs 1 crore, while the RBI has given Rs 7,000-crore refinance facility to Small Industries Development Bank of India, the prime lending institution to MSMEs. The ministry of MSME has also asked RBI to earmark 50% of net bank credit under the priority sector limit for this sector, besides increasing the loan growth target from 20% to 40%.
Also, stock market regulator Securities and Exchange Board of India last year issued guidelines for starting an exchange exclusively for SMEs. However, with weak investor confidence and lower networth of SMEs, this option does not seem viable at this moment.
?Accessing funds through stock markets is not a viable option for most SMEs due to high cost with current set of regulatory and institutional mechanism. The exchange may come some time during the next financial year. Though the timing is very ominous as the investor sentiments are not very encouraging,? FISME secretary general Anil Bhardwaj said.